Lawsuiting Up

Operators balance new concepts with increasing legal exposure.

While concepts such as private label, foodservice and self-insurance are opening doors for convenience retailers, an equal amount of unwelcome exposure is sneaking in from laws governing public safety, employment and intellectual property.

Emphasizing the need to be proactive, attendees of CSP’s 2010 Leadership and Crisis Prevention Forum held in July in Indianapolis shared best practices on how to protect their companies from potential lawsuits.

The 33 retailers, lawyers and suppliers present also updated each other on changing laws tied to employment law, such as the expanding definition of a “caregiver” under the Family Medical Leave Act (FMLA). Speaking on that issue, David Bridgers, vice president and general counsel for Louisville, Ky.-based Thorntons Inc., said the U.S. Equal Employment Opportunity Commission (EEOC) recently expanded the definition of a caregiver, allowing for someone who may not be a parent or legal guardian to qualify for FMLA leave.

“Before you deny [employees], get to counsel and get the facts,” Bridgers said.

The three-day gathering produced numerous themes:

New ventures, new exposure. As retailers try out new products or expand with opportunities such as private label, they are advised to pay attention to product safety and intellectual property.

Overseas partners. Working with companies overseas may lead to the sale of products containing hazardous chemicals or having questionable construction. Retailers must be vigilant, especially in countries where finding the responsible parties may prove difficult. Trust can lead to exposure. Working with both foreign and local partners who say they have the proper insurance may not eliminate liability. Some part ners may have inadequate policies or may have a carrier that has recently gone out of business.

Be proactive. From quickly gathering evidence after an incident to properly training employees, maintaining a proactive stance to reduce exposure is an important tactic to adopt.

Retailers as targets. The growing strength of the retail sector as a whole has made c-store operators a primary target for lawsuits. From “slip and fall” claims to outbreaks of salmonella, retailers should expect a growing number of lawsuits simply because of the retail sector’s continuing success, said Steve Burkhart, vice president and general counsel for BIC Corp., Shelton, Conn. The number of retailers in general making the Fortune 50 list in 1964 was zero as opposed to 11 today, he said.

“Retailers have replaced manufacturers in many ways,” Burkhart said. “Retailers have the money to drive what’s in stores and are a perfect target [for litigation] and government enforcement.”

MUSICAL CHAIRS

The game of reducing if not eliminating legal exposure is one of musical chairs, according to Mike Bassett, partner in The Bassett Firm, Dallas: “Make sure you have a seat when the music stops.”

Proper insurance, training procedures and follow-up policies all lead to fewer lawsuits and payouts in fines, compensation and damages. However, even “safe” companies hire “unqualified” employees, violate their own edicts, have accidents and lose lawsuits, according to Bassett.

Growing areas of concern for the industry, especially as it expands its private-label endeavors, are product liability and intellectual-property rights. Burkhart of BIC spoke of instances in which retailers can be sued for products they import or foodservice items that make people ill. Retailers need to know where items and ingredients come from to track and assess liability. Even if retailers are ultimately not responsible, plaintiffs will go after local businesses before trying to identify and sue overseas companies.

While global opportunities do exist for retailers, overseas companies may produce food products with potentially hazardous chemicals simply because they are not restricted by U.S. regulation. In other cases, a foreign manufacturer may agree with a retailer not to use leadbased paints, but if the retailer does not continuously monitor the quality, the manufacturer may swap in prohibited ingredients.

Burkhart said that many incidents of such wrongdoing have emerged from China, where not only is it difficult to locate the original manufacturer after defects have been found, but many companies are state-owned, making enforcement of U.S. laws even more difficult.

A specific case Burkhart cited involved the use of melamine, a chemical used in plastics and fertilizer, that ended up in pet food and infant formula made in China and sold in the United States. Burkhart said the Food and Drug Administration did not check for the substance because of how unthinkable it was for a company to even use it in food. Apparently, much of the product was made by a state-owned firm; according to Burkhart, Chinese officials have thus far refused to hear the lawsuits. A U.S. family injured by the product is looking for a U.S. company to sue.

In a case of ingredient substitution involving antifreeze in toothpaste, the importers of the product are facing criminal charges. Citing an article in The New York Times, Burkhart said four executives from American companies were charged with receiving, selling and distributing tainted product.

“They didn’t make the product,” he said. “They just bought it.” Obtaining “certificates of conformance” or legal documents that hold manufacturers to specific production standards is one way to shield a retailer from liability, Burkhart said. “At least if you’re sued, you can say you made the effort,” he said.

Not all these cases are about product liability either, he said, citing a case in which a retailer developed a new product, only to be sued for patent infringement by San Francisco-based Williams-Sonoma Inc. “With private label, you may be infringing on someone else’s idea—that’s a common thing,” Burkhart said. “Are you checking patents and trademarks before selling products in your stores?”

Due diligence involves researching relevant patents, as well as avoiding the sale of counterfeit products. “Counterfeit products are a big issue,” he said. “The government has to hold [seized] product while the legal process runs its course, and then they destroy it. It may be product you paid for—and they may require you to pay destruction costs.”

ENSURING INSURANCE

At the core of providing a legal shield is creating an infrastructure of coverage that’s both cost-effective and comprehensive. For many retailers present, selfinsurance was a part of the answer, as was an extensive look at all contracts and partnerships. Reviews included knowing the extent and validity of the trading partner’s insurance policies, indemnity or inclusion of retailers into partners’ coverage and the ability to locate and hold parties accountable.

Contracts are often the starting point. Bridgers of Thortons advised that all contracts be reviewed by legal counsel because “too many things involve legal terms and principles.” He emphasized the importance of avoiding one-sided indemnity; the ideal would be reciprocal indemnity, or both sides covering each other for specific areas of exposure.

Another strong recommendation was that retailers move past a company’s reputation (which may be impeccable) to make sure all the necessary insurance, certifications and processes are in place. “If you get one or two customers sick,” Bridgers said, “the damage to your image will far outweigh the damages you pay in a criminal or civil suit.”

ERA OF TECHNOLOGY

An area of burgeoning interest for retailers concerns the Internet and the multiple personal and privacy issues that arise from social networking— from employees misusing work computers while on the job to internal secrets leaking out to the competition, according to Wells Blaxter, CEO of BlaxterLaw, San Francisco.

But the Internet can be an important marketing tool as well, he said, pointing out that Dell has sold $9 million in computers and related products through the social-networking sites Twitter and Facebook in the past year.

Ultimately, the issue is one of “reputation management,” Blaxter said. Using analytic tools from Internet companies such as Google can help a retailer spot communications relating to his or her company as it slips into the Web universe. Then the company can get alerts when communications about the chain surface.

GETTING PROACTIVE

Unfortunately, a tendency for c-store operators—and for people in general— is to avoid tough calls, and keep quiet until the potential liability becomes substantial.

When referring to incidents involving his delivery trucks and when to review information recorded on the vehicle’s “black box,” Todd Wright, vice president of risk and benefit for TETCO Inc., San Antonio, said he prefers to know what’s on the tape sooner vs. later. “I want to deal with the facts,” he said. “Then [companies] are able to defend themselves.”

Retailer Mary Anne Macica, risk manager for Stewart’s Shops Corp., Saratoga Springs, N.Y., advised retailers to be proactive when handling riskand- liability issues. “We tell our managers: If you think you need to write up [an incident], then the answer is yes,” she said. “Take the pictures, take the camera off the wall and get the video. My cell number and my extension are on the report form.” If a retailer waits until a possible lawsuit lands on his or her table, valuable evidence may be lost, said Claudia Ryan, partner with Towne, Ryan and Partners, Saratoga Springs, N.Y., who works with Macica.

“Why should another floor sign come out of their budget? Or cold patch if there’s a pothole in the parking lot?”

Evidence of how effective the company’s mindset is comes with Macica’s track record. She said the company has not had to pay an insurance claim in the past five years.

The trick is having a service-focused mentality. “If there’s a problem,” she said, “it’s our job to help [our employees]. We are working as a team. We’ve changed the attitude of having a separation of church and state. We’re there to help you.”

Since 2003 CSP magazine has ranked No. 1 in readership and market share over all other industry publications. C-store marketers have identified CSP as the preferred magazine source for their trade marketing communications. With industry-leading, highly targeted circulation to more than 100,000 subscribers, CSP reaches the key convenience retailing decision-makers fifteen times a year.